A123 Deal With Wanxiang Raises Security Concerns, Lawmaker Says

A Florida lawmaker opposed the
potential sale of control in A123 Systems Inc. (AONE), the U.S. maker
of automotive rechargeable batteries, to a Chinese company,
citing national security concerns.

Representative Cliff Stearns, a Florida Republican, made
the comments yesterday after A123 announced a non-binding deal -
- worth as much as $450 million -- that would allow China’s
Wanxiang Group Corp. to buy control of the U.S. company. A123,
which supplies lithium-ion batteries to luxury plug-in vehicle
maker Fisker Automotive Inc., is the recipient of a $249.1
million federal grant. Three calls to Wanxiang’s public
relations office were unanswered.

“It appears the Department of Energy and the Obama
administration have failed to secure sensitive taxpayer funded
intellectual property from being transferred to a foreign
adversary, which raises serious national security issues,”
Stearns said in an e-mailed statement.

The congressman’s opposition highlights the challenges
Chinese companies face in acquiring U.S. companies. Two
congressional Democrats have said state owned Cnooc Ltd. (883)’s $15.1
billion offer to buy Nexen Inc. (NXY), a Calgary-based company that
operates in the U.S. portion of the Gulf of Mexico, should be
held up until the U.S. negotiates concessions from China.

A123 rose 6.4 percent yesterday in New York trading after
announcing the financing deal with Xiaoshan City, China-based
Wanxiang, the nation’s largest auto-components company. The U.S.
company’s stock has plunged 69 percent this year as the costs of
replacing batteries for Fisker prompted unprofitable A123 to
pursue additional fundraising.

Buying Control

The accord allows Wanxiang to buy an 80 percent stake in
A123, which calls itself the U.S. leader in advanced batteries.

A123 received funds from the Energy Department as part of a
program started in February 2009 to support construction of U.S.
plants to make batteries for hybrid and electric vehicles. The
company used the funds to build the Livonia, Michigan, factory
that made the flawed Fisker packs.

“There is definitely a growing concern about foreign-
controlled or owned companies attempting to gain a foothold into
our supply chain in the United States,” Stearns said. “We need
to make sure the Federal government isn’t an unwitting
accomplice to the theft of our own national secrets by providing
them with multimillion-dollar government grants and loans.”

Federal Grant

The funds A123 received from the Energy Department can only
be used for its U.S. operations, said Amy Brundage, a White
House spokeswoman.

“Under the terms of the grant agreement, the company can
only use funding to support U.S. manufacturing facilities,”
Brundage said in an e-mail late yesterday. “Any changes to the
scope of the grant would have to be approved by DOE, and DOE
would not approve any changes that allowed the grant money to be
used for anything other than investment in the manufacturing
facilities here in the U.S. or U.S. jobs.”

Wanxiang would give A123 as much as $75 million in debt
financing under the terms of the agreement, Waltham,
Massachusetts-based A123 said in a statement. Wanxiang may also
buy $200 million of senior secured convertible notes and invest
$175 million by exercising warrants, which could be converted
for shares representing a stake of about 80 percent, according
to the deal.

Wanxiang said in February that it will invest $25 million
in Kansas City, Missouri-based Smith Electric Vehicles Corp. (SMTH) and
$75 million in a joint venture in Hangzhou, China, that will
develop and manufacture all-electric school buses and commercial
vehicles.

Farmer Chairman

Its chairman, Lu Guanqiu, 67, was born into a family of
farmers in Hangzhou, and started a farm-machinery maintenance
shop in 1969 that’s grown into China’s biggest auto parts maker,
according to its website.

Wanxiang said in March it would need to adjust its
fundraising plans because of the $55 million cost of recalling
Fisker Karma battery packs that have misaligned hose clamps.

The Wanxiang deal “is the first step toward solidifying a
strategic agreement that we believe would remove the uncertainty
regarding A123’s financial situation,” Chief Executive Officer
David Vieau said in the statement.

It will also provide access to customers in China, he said.

“Superior battery chemistry, which was to be a U.S.
competitive advantage, is now theirs,” Bob Lutz, General Motors
Co. (GM)’s former vice chairman, said in reference to the Wanxiang
deal in a blog post on Forbes.com. “But why are we surprised?
The Chinese have all the money in the world, and if they ever
called the loans they have out to the U.S., the global economy
would stop, and our nation would be in foreclosure.”